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FRC concerned about principal risks and uncertainties reporting

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02 Feb 2011

The Financial Reporting Review Panel (FRRP) of the UK Financial Reporting Council (FRC) is concerned about how companies are reporting the principal risks and uncertainties facing their business.

The UK Companies Act 2006 requires directors' reports to contain a business review which must itself contain a description of the principal risks and uncertainties facing the company. In assessing whether directors' reports comply with this requirement, the FRRP has found that in many cases:
  • The directors' report does not clearly identify which risks and uncertainties the directors believe to be the principal ones facing the business.
  • A long list of principal risks and uncertainties is given and the list raises a question as to whether all the risks and uncertainties on the list are actually principal ones.
  • The description given of a risk or uncertainty is in generic terms and it is not clear how that risk or uncertainty applies to the company's circumstances.
  • The disclosure is of a risk framework rather than of the risks or uncertainties themselves.
  • The principal risks and uncertainties disclosed are not consistent with other information given in the report and accounts.
  • The directors' report does not state how the company manages its principal risks and uncertainties.

The FRRP urges the companies not to hide behind boilerplate disclosures since "Boards who retreat behind boilerplate give the impression that they have not themselves understood the risks they face".

The requirements of the UK Companies Act are also reflected in IFRSs. The Conceptual Framework for Financial Reporting states: "Financial information is useful when it is relevant and represents faithfully what it purports to represent." [F:QC4]. IAS 1.25 says that the uncertainties must be disclosed if management has significant concerns about the entity's ability to continue as a going concern; IAS 1.122 & 125 require disclosure of judgements, assumptions and sources of estimation uncertainty in preparing financial statements; and in December 2010 the IASB published an International Financial Reporting Standard (IFRS) Practice Statement Management Commentary, a broad, non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRSs, which also contains recommended risk disclosures (paragraphs 31 and 32).

Click for FRC press release (link to FRC website).

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